Audacy Inc (AUD) 2012 Q3 法說會逐字稿

Good morning and welcome to Entercom's third-quarter 2012 earnings release conference call. All participants will be in a listen-only mode. This conference is being recorded. I would like to introduce your first speaker for today's call, Mr. Steve Fisher, CFO and Executive Vice President. Sir, you may begin.

Thank you, operator, and thank you, everyone, for joining us this morning and appreciate your participation in our call and also those that are listening on replay. This call is being recorded. A replay will be available on our Company website shortly after the conclusion of today's call, and also available by telephone at the replay number noted in our press release this morning. With our morning's press release we noticed that for today's call we ask you to submit your questions in advance, the questions at entercom.com. In addition, as always I'm available for any follow-up questions directly if you'd wish to call me at 610-660-5647.

Before I turn the call over to David I'd like to remind you that should the Company make any forward-looking statements, such statements are based on current expectations and involve risks and uncertainties. The Company's actual results could differ materially from those projected. Additional information concerning those factors that could cause results to differ is described in the Company's SEC filings on Forms 10-Q, 10-K and 8-K. The Company assumes no obligation to update any forward-looking statements. During this call we may reference certain non-GAAP financial measures and we would refer you to our website at entercom.com for a reconciliation of such measures and other pro forma financial information that you might find interesting.

So with that I'll turn it over to David Field, President and Chief Executive Officer.

Thanks, Steve. Good morning, everyone. Thanks for joining today's Entercom third-quarter earnings call. I'll start with a summary of the quarter's financial highlights, followed by some additional color on our operations and a few noteworthy developments, I'll then touch on Q4 pacings before turning it back over to Steve and your questions. Pleased to report that Entercom posted strong growth in station operating income and EBITDA during the quarter. Intercom's third-quarter revenues were up 2% to $102.3 million. Station expenses were down by a sizable 9%, or $6 million. As a result, Entercom's adjusted EBITDA surged 26% to $34 million for the quarter.

The quarter began strongly in July, with revenues up 4%, excluding the benefit of sales from our second-quarter acquisition of KBLX in San Francisco. However, as you have heard from a number of other media companies, business conditions slowed during August, impacting our performance, particularly in September. There is considerable speculation about the cause of the September slowdown being attributable to the Olympics or the election or the economy. While we don't have a definitive answer to this question, we can say that the dip appears to be aberrational, as fourth-quarter business conditions, even excluding political, have rebound and look pretty solid. I'll speak more to that in a few minutes.

Overall, Entercom gained revenue share during the quarter, albeit modestly. Our best-performing markets during the quarter were Indianapolis, Memphis, Norfolk and New Orleans. As mentioned, we did have incremental revenue this quarter versus last year from our recent acquisition of KBLX, without which our Q3 revenues would have been up just fractionally. Our strongest categories were auto, financial services, grocery, and health and medical. Local revenues were up low single digits while national was down single digits. Political revenues were up considerably, albeit lighter than we expected and below our results in the prior two election cycles.

Turning to expenses, I mentioned earlier that our station operating expenses decreased by 9% in the quarter and that includes the absorption of incremental expenses in San Francisco related to our acquisition of KBLX. It is important to point out that, as we indicated in our last earnings call, the quarter benefited from a one-time credit from prior-period BMI performance fee overpayments of about $2 million. But even after excluding this one-time benefit, our expenses were still down by about 6%, continuing the trend of significant cost benefits we have been able to achieve over the past four quarters. And fact, over that time we have now achieved year-over-year operating expense reduction of 4%, 4%, 5% and now 6%, excluding the impact of the BMI settlement.

Stepping back from the numbers, our focus on business model reinvention has clearly had a significant impact on our operating expenses, and our reinvention is impacting our revenue opportunities, as well. As we have demonstrated over the past few quarters, we've been able to drive down expenses while the same time increasing our investments in new local brands and content, expanded distribution, enhanced digital platforms, stronger operating systems and sales product development. These actionings -- these actions are strengthening our competitive position and enhancing our future growth prospects. Let me elaborate on a few of these recent initiatives.

As you may recall from prior earnings calls, we made a strategic decision in 2011 to initiate a number of format changes that diluted our top-line results to strengthen some of our core AM news, talk and sports stations by simulcasting them on FM. In addition, we launched several new brands, as well. Three of these moves were in our two largest markets. We indicated over the past year that the reformats and changes would transition from a drag to contributor of revenues in the second half of 2012 and, indeed, we see that unfolding in this past quarter and in our fourth-quarter pacings. One of these moves occurred in Boston, where as many of you are aware, in September of last year we begin to simulcast our leading Boston sports talk station, WEEI, onto the FM band.

This move was a great success, producing strong ratings growth that resulted in most of WEEI's audience now listening on the FM signal. Now listener migration provided an opportunity for us to reformat the AM signal and broaden our content lineup in the market. So on October 5th we launched a new partnership in Boston with ESPN to bring their leading national sports talk and play-by-play content to 850 AM. Meanwhile, WEEI continues on 93.7 FM, broadcasting our award-winning local sports talk programming, as well as Red Sox baseball and Celtics basketball.

In Gainesville, Florida in September we began a new multi-year partnership with the University of Florida and its two radio stations in Gainesville. The university continues to program these leading sports and country music brands and Entercom now sells the commercial advertising for these stations through a joint sales agreement. Our relationship also provides educational opportunities to University of Florida students at Entercom stations. The partnership compliments our two FM stations in the Gainesville market and allows us to benefit by leveraging our existing sales infrastructure.

Finally, similar to Clear Channel, we announced an agreement with leading national independent record label, Big Machine Label Group, that aligns our business interests. We believe that by working with the labels and the artist community to establish new business model we will ultimately enhance the opportunities for ourselves and our label and artist partners.

Turning to the current business climate, fourth-quarter pacings are solid and we expect another strong quarter of EBITDA growth. Excluding KBLX, pacings for the fourth quarter are currently up 6%, with October up more significantly and November and December pacing up, but at a somewhat slower pace. What is encouraging to note is that our local category is up nicely in each of the three months of the fourth quarter. It does appear as though our total political spending will be a bit lighter than we had hoped for. A few other observations and notes. Our business model continues to consistently generate strong free cash flow. We had more than $20 million in free cash flow in the quarter, which equals $0.55 per share. Our trailing 12-month free cash flow per share is $1.65, which represents a 26% free cash flow yield based on yesterday's closing price of our stock.

We are also proud to note that during the quarter Entercom was named by Information Week magazine as one of the top 500 technology innovators in the United States. Intercom was the only radio broadcasting company named in the top 500 and joined such innovative companies as Boeing, Verizon Wireless and Cisco. And we are increasing excited about our future opportunities, as we continue to deepen our audience engagement and reach our listeners wherever they are. While streaming represents a low single-digit percentage of our total listening, we are experiencing strong growth in our digital platform, led by our mobile apps and listening on Tuneit.

A final note, the public usage of radio continues to grow and remains robust. Radio is one of America's three dominant reach media, along with television and the internet, and it's had some very limited fragmentation from satellite and Internet competitors, no impact from DVRs and its position as a highly cost-effective medium for advertisers, and our continued reinvention is enabling us to provide our customers with highly-effective, multi-platform marketing solutions that were unimaginable just a few years ago. With that I'll turn it over to Steve for some additional thoughts before we turn to your questions.

Thanks, a lot. David just covered a lot so let me just add a little more color and then we'll turn to your questions. David just summarized our recent history of strong expense management once again continued in this quarter. As we mentioned on our last call, the radio industry reached a comprehensive agreement with BMI, one of the major music label -- music organizations we license with. That deal was approved by the federal rate court during the third quarter, so in this quarter we recorded a one-time benefit of $2 million to reflect a refund due from prior-year overpayment. In addition, we and the industry will benefit from a more favorable licensing rate going forward.

Looking at fourth-quarter expenses and expense trends, we would expect to see a small incremental growth with low single digits versus prior year. And note, this results primarily from increased expenses from our new sports rights agreements on the Buffalo Bills football games and from our recent station acquisition earlier this year, which David mentioned. You should know that we remain committed to further expense reengineering efforts and believe there is more we can achieve in the future.

Third-quarter net interest expense was $13.3 million. As a note, this included about $1.2 million in non-cash deferred financing costs. Our non-cash equity compensation expense for the quarter was $1.3 million. And as I mentioned to the expense in the past, we do a true up in the fourth quarter. We would expect that to be about $1.8 million for that line item in the fourth-quarter. Our tax rate for the quarter was a little higher than prior quarters. This is primarily because the prior quarters had some positive booked tax adjustments resulting from prior-period adjustments. We expect fourth-quarter and full-year book tax provision to be in the mid to high 40% range. But I think the more important thing to note is this is for GAAP tax provision only. We are not a taxpayer and don't anticipate being a taxpayer for quite a bit into the foreseeable future.

The news that David covered on the revenue and on the cost side lead to some, I think, traumatic shi -- significant shifts on the balance sheet. We ended the quarter with $587 million of debt on our balance sheet, which reduced bank leverage for the quarter to 5.1 versus our 7.0 leverage covenant. So we've seen significant leverage decline through the years through a combination of both debt reduction and increased EBITDA. So with that, let me go to your questions.

And David, I think there were a couple questions that came in. Let me start macro and then we'll go micro. Marci Ryvicker and several others asked if we see Apple's potential entrance into the steaming music business as a positive or negative for broadcast radio?

First, Apple's a great company and I'm sure they'll do well, as they do in all of their endeavors. It's probably not a great day if you're in that space, but I would say that we look at radio being a very different product with our local personalities and our -- I should say, our compelling personalities, our local content, news, talk, sports, et cetera, not to mention our music. If you look at the macro, audio is thriving and growing, it's bigger than ever. After many years of satellite and internet competition we are thriving, with over 90% of all listening to local over-the-air broadcast stations. So we feel very good about our place in the ecosystem and expect radio to continue to perform well into the future.

Okay. Shifting from the macro to the micro. Mike Kupinski of Noble Financial asks if you can update on ratings trends for our top stations in Boston and San Francisco, particularly where we had format changes there?

If you look at our ratings on our -- on WEEI, our sports leader in Boston, compared to a year ago they're up -- they've been up about 30% or 40% year-over-year, which we feel is terrific. As I mentioned earlier in my remarks, it enables us now to spin out a new station, which will be incremental revenues and cash flow for us.

In San Francisco, if you look at our developmental stations there we're making great progress. We're not -- our newer stations there are not market leaders and we have a ways to go, but both KBLX and The GAME have had three straight up books, making steady progress. Our research looks good and we feel very good about where we're headed in that market, as well.

Maybe staying on the program theme, then, and dovetailing off your comments on sports in Boston, Davis Hebert of Wells Fargo asked, is the new CBS sports network something Entercom would consider for some of its stations?

Sure, we're with to working with anybody, but I think the bigger point is that Entercom, as one of the largest owners of local sports stations around the country, is a beneficiary of the strong competition amongst various players in the national or network sports business. So we feel very well positioned and are very excited about all the different content opportunities that are out there.

Maybe I'll take this question, David. Marci Ryvicker asks for data points on political for both Q3 and Q4 and I know Avi Steiner at JPMorgan also wanted the data point of how Q3 compared to last year. So, let me walk you through a few data points to give you color. Q3 we had about -- well, we had $1.2 million and that was up about $1 million over prior year. That was down sequentially -- down from the last presidential election year, which is 2008. So, again $1.2 million in the political revenue for Q3. And Q4, while we're not yet through -- obviously we have 1.5 week to go -- we have over $4 million on the books for the fourth quarter 2012 in political.

David, let me stay on political and a Washington theme -- I feel like Mike Douglas here moderating a talk show. So let's stay with the Washington political theme. What's Entercom's position with respect to the royalty debate taking place, primarily in Washington these days?

I think that we believe that the streaming rates, which we pay under the CRB numbers, are ridiculously high and need be adjusted. So, we are supportive of reform to establish criteria that more fairly reflects marketplace conditions. I will point out that we also do believe in private market solutions and our Big Machine Label deal I think it's a great example and Clear Channels deal with Big Machine and with Glassnote, as well. Again, great examples of finding common ground to align interest between the labels and the artist community and broadcasters. So we're certainly open to doing more of those deals, which makes sense.

I'll add one more point, which is interesting. As folks take a look at the equities of the various royalty arrangements it's worth noting that on our streaming cost we pay twice the rate that Pandora pays. So, as they make a lot of noise about reform -- and we agree with them that it needs to be reformed -- I think it's worth pointing out that, the bigger adjustment potentially could come on to benefit local broadcasters. If and when that all plays out.

Okay. And I'll go back on political before I move onto the next question. I mentioned over $4 million on the books for the fourth quarter. Just, again, for some of you in your thinking of how to index that, last year where we had a couple of heated local elections we had about the $3.7 million in the fourth quarter of 2011. Let me change topics, go a the question from Marci Ryvicker at Wells Fargo. David, we've heard less and less about daily deals from both radio and television companies, can you tell us if your strategy in this -- that sector has changed?

Not at all. We're believers in this sector. We think that there is a huge market and a growing market for daily deals and for digital couponing, et cetera, and believe that radio lends itself beautifully to capitalizing on a significant chunk of that marketplace going forward. So we remain very committed to building out products for our customers that enable us to take advantage of that opportunity.

Several, David, have mentioned about the press release, talked about our new announcement in Gainesville, Florida with the University of Florida and are trying to gauge what kind of impact do you expect that to be on your business model?

It's very small. I would say it's -- we're excited about the deal, we're excited to be partners with the University of Florida. Two good properties down there that we're excited to represent and work with them on the educational side, but in terms of the financial impact on the Company it's not significant.

Let's turn to the balance sheet. Aaron Watts of Deutsche Bank -- and I'm going to connect it to a couple questions from Avi Steiner at JPMorgan, as well, both looking on the high yield. So, obviously a little more fixated on the balance sheet side. Saying, hey, David, you've discussed in the past getting to 5 times leverage by year-end 2012 and now looks achievable.

You've also talk in the past of a target of 4 to 4.5 times. When do you see that and what would the Company begin to think -- how the Company begin to think of free cash flow in 2013 and beyond? And let me pause then and go to the same -- I'll take a connected question from Avi Steiner. There seems to be some stations on the market. Cox Radio is announced in the past recently this week, Nexmedia has announced there could be some stations on the market, so how does Entercom view M&A over the foreseeable future?

A lot of questions in there, Steve. I'd say if you step back and think big picture, First of all, we're very pleased with the trajectory of our delivering over the course of the last couple years. We continue to generate enormous free cash flow and we continue to channel that towards delivering. And, again, it moved the needle significantly on that and again are approaching the 5 times level where we essentially are today. We expect directionally that will continue into next year. Obviously we're not -- we have no forecast for next year, but I think it's safe to say that we're going to continue to significantly delever going forward.

Now as we get down to that target leverage zip code that you referenced earlier and we've reference on prior calls, it does open the opportunity for us to consider opportunities to think about dividends buybacks, those kinds of opportunities. As far as acquisitions are concerned, we've been pretty public about the fact that we're not in the market looking at anything right now and obviously keep our eyes open and figure -- and determine what's in the best interest of our shareholders going forward. But our first priority for now, remains delevering and continuing to build our financial flexibility.

Two more questions, I'll take the next question. It's on the expense side, some questions. We've mentioned $2 million BMI credit, is that in the station expense line item, wanted to confirm that, and the answer is yes. And then second. With ASCAP earlier in the year and now BMI how do we think about these two line items going forward? Good point, let me step back. Obviously we in the industry have enjoyed some cost savings this year as a result of those them two settlements.

That's moved the industry from a fixed payment contractual basis with both organizations to a percentage of revenue. That percentage of revenue varies whether a station is a music station or a talk station -- news, talk, supports. But if you step back and look in the macro as you think of the modeling so you know what size of that. It generally is going to represent about [2.5 to 2.6] of revenue within the Entercom portfolio, so a data point on that. David, you said we don't do forecast for 2013, but quite a few people wanted to know what our thinking about 2013? What kind of color are we hearing from advertisers, what's your outlook for radio?

I think it's just too early to have that conversation. A lot of it goes to global macro considerations and world events and so forth, which we're all cognizant of. We are -- I'd say essentially optimistic about next year, but it's really too early to have any sort of a granular or tangible conversation around 2013 at this time.

So I think I've captured grouping together all the questions submitted in advance so I have no further.

Steve, thank you. Everyone, thanks for joining us today and again, we'll look forward to reporting back to you in three months.

Thank you for attending today's conference call, you may now disconnect.